Internal Risk Management and Control

TCV’s operations expose the Corporation to financial and operational risks. Effective management of these risks is one of our core organisational objectives.

We aim to provide a robust and consistent risk-management, performance-measurement and capital-management framework that is commensurate with TCV’s business mandate, corporate objectives, business plan and appetite for risk.

In order to set parameters for our exposure to risk, TCV’s Board has adopted a formal Risk Appetite Statement that is reviewed and updated annually.

The risk management framework we have developed is consistent with the Prudential Policy requirements established by the Treasurer and is monitored by the Board and the Prudential Supervisor appointed by the Treasurer. This framework includes a dedicated and independent Risk and Performance Measurement business unit and established internal risk management policies and controls set by the Board of Directors and senior management. The framework is further strengthened by clearly identified delegations, responsibilities and authorities.

In addition, TCV maintains an Internal Audit function (currently outsourced to PricewaterhouseCoopers).

Interest Rate Risk

Interest rate risk is the risk of a loss caused by adverse movements in interest rates on financial instruments and their derivatives.

Since this is the principal market risk TCV is exposed to, we have a comprehensive measurement and control framework to manage it, using both Value-at-Risk and other portfolio level risk measures. Risk and revenue are monitored daily within an approved control and limit structure, with breaches or excesses being reported to the Managing Director and Board.   

Funding Liquidity Risk

Funding liquidity risk is the risk that TCV may not be able to raise funds to meet its financial obligations as and when they fall due.

TCV has a comprehensive internal policy on liquidity risk management, key elements of which are:

  • Operating (or day-to-day) liquidity management. We ensure that there are sufficient cash inflows, including from maturing assets, to fully meet the obligations of maturing liabilities at all times.
  • Prudential liquid assets holding. We require that a minimum level of high quality, readily liquefiable assets is held at all times to meet any emerging liquidity requirements.
  • Balance-sheet mismatches and sources of funding are monitored to make sure they are within acceptable parameters.
  • We have a liquidity crisis action plan that is reviewed and updated periodically.

The size of the minimum prudential liquid assets holding requirement is assessed periodically through liquidity stress testing. 

Investment Liquidity Risk

Investment liquidity risk is the risk that TCV may need to dispose of an investment at a particular time when a lack of market liquidity makes it impossible to achieve a fair return. To manage this risk, eligible investments must satisfy certain minimum market-liquidity criteria.

Credit Risk

Our exposure to credit risk arises mainly through our investment in financial assets and through outstanding derivative transactions with market counterparties. The credit risk arising from loans to participating authorities is offset, in all instances, by a guarantee from the Treasurer of Victoria.

The types of investments that TCV can make and their minimum credit quality have been set by the State Government under the approved investment powers for TCV. Under these powers, TCV’s credit-risk management framework has set conservative limits for both the quality and amount of credit exposure TCV can hold.

Our credit assessments are based on both external credit ratings and in-house credit analysis. Generally, we require long-term ratings of at least A-/A3/A- by Standard & Poor’s/Moody’s/Fitch for exposures of up to 12 months and progressively higher minimum ratings for longer-term exposures. Credit limits must be approved by the Board or the Managing Director (under powers delegated by the Board). Our managers actively monitor credit exposures for changes in credit quality and modified limits.

Operational Risk

TCV has adopted the generally accepted definition of operational risk as ‘the risk of indirect or direct loss resulting from inadequate or failed internal processes, people and systems or from external events’. We use a scorecard approach to regularly map and evaluate our operational risk profile, assessing the likelihood and consequence of identified risks. Plans are then developed to manage these risks and our implementation of them is monitored regularly.

Prudential Policy on Capital

Our risk management framework incorporates the risk based capital adequacy approach specified in our Prudential Policy. This requirement is adopted from the capital adequacy standards the Australian Prudential Regulatory Authority (APRA) sets for Australian banks. Under this policy, we are required to hold a minimum capital adequacy ratio of 8% of risk-weighted assets. We aim to maintain a capital ratio of at least 10%.

Business Continuity

We have put in place detailed business continuity and information technology disaster recovery plans to ensure that:

  • All critical TCV business operations are safeguarded in all situations.
  • Key resources are available and effectively managed.

These plans are reviewed quarterly and tested annually.

Occupational Health & Safety (OH&S)

We manage risks to the personal safety of our staff and visitors to our premises through a comprehensive occupational health and safety program.

External Compliance

Our extensive compliance monitoring is consistent with the State’s financial management principles and financial risk management framework. Several external entities are responsible for monitoring, supervising and reporting on our activities, including:

  • Treasurer of Victoria – Member of Parliament and TCV’s sole shareholder.
  • Prudential Supervisor – reports to the Treasurer. Oversees TCV's risk framework and provides independent advice to the Treasurer on the financial health, risks and risk management policies of our operations.  The Treasurer has appointed KPMG as TCV’s current Prudential Supervisor.
  • Department of Treasury and Finance – reports to the Treasurer. Maintains a shareholder monitoring role and manages the Prudential Supervision relationship with TCV.
  • Prudential Auditor – reports to the Prudential Supervisor and DTF. Ensures information reported to the Prudential Supervisor by TCV is accurate and that prudential requirements have been met. The Treasurer has appointed PricewaterhouseCoopers to undertake this role at present.
  • Auditor-General – reports to Parliament. Provides an independent audit of TCV’s financial report and expresses an opinion on it to the Members of the Parliament of Victoria, the responsible Ministers and TCV’s Board, as required by the Audit Act 1994. The Victorian Auditor-General’s Office has appointed Ernst & Young as its current agent.
  • Minister for Finance – Member of Parliament. Monitors TCV’s compliance with the State’s financial and tax reporting and accountability framework via DTF's annual compliance certification process.